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Energy Trading {Unit 07}

Energy Trading {Unit 07}

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matter of energy trading
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Published by: rathneshkumar on Feb 19, 2009
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Natural Gas Market in India
Natural gas, earlier considered as just a by-product of crude oil production, has now gained significantimportance as a valuable source of energy internationally. Natural gas is now gaining prominence asthe fuel of the future as it meets clean fuel requirements and is cost effective for major industries, ascompared to traditional fuels such as coal and naphtha. Gas assets in India did not receive muchattention till few years back. However, mounting oil bills and need for cleaner fuels has necessitatedthe country to explore its gas potential. Supply deficit has long been a significant feature of India’s gasmarket. However, year 2004-05 could well become a turning point as these constraints are nowloosening up due to LNG (liquefied natural gas) imports and domestic gas finds.
Gas market in India
Natural gas industry in India is under government control today due to its strategic importance. Till fewyears back, the production of natural gas in the country was totally under the control of two PSUs viz.Oil and Natural Gas Corporation (ONGC) and Oil India Ltd. (OIL). However, with the New Explorationand Licensing Policy (NELP), private players have been allowed to participate in exploration andproduction of natural gas. Currently, the two PSUs still account for 83 percent of domestic gasproduction. Marketing of gas and pipeline infrastructure is undertaken by GAIL India Ltd. Companiessuch as Gujarat Gas Company Ltd. (GGCL), Mahanagar Gas Ltd. (MGL) and Indraprastha Gas Ltd.(IGL) are engaged in distribution of gas and are regional players. Power and fertilizers are the twoprimary sectors which together account for close to 80 percent of the gas consumption. Besides, othersectors such as petrochemicals, sponge iron and transportation also consume natural gas. Demandfor natural gas in India for 2003-04 was estimated at 98 mmscmd (million standard cubic metres perday). Against this demand, allocations made by Ministry of Petroleum and Natural Gas (MoPNG)stood at around 120 mmscmd. Currently, in India, natural gas forms 8 percent of the primary energyconsumption as compared to 24 percent worldwide. According to India Hydrocarbon Vision 2025report, demand for natural gas is expected to show a sharp rise in the future with the demand reachingto 391 mmscmd by 2024-25. The report also expects that the share of natural gas in total energy mix
to go upto 20 percent. The demand for natural gas is expected to grow at a CAGR of more than 7percent by 2007-08. The major force behind this demand growth will be investments in power sector.Government is planning to add power generation capacity of 41,110 MW under the Tenth Plan andover 60,000 MW in the Eleventh Plan. Fertilizer sector will fuel this demand further as major playersswitch from naphtha to gas as feedstock.Indian market is looking for LNG from suppliers with softer terms and conditions some of which arementioned below:
Shorter duration contracts
Pricing formula
Fixed price
Quasi fixed Price by setting a formula
Price with Floor and Ceiling
Negotiated ratio of fixed elements while lowering the ratio of the crude oil-linked portion.
Flexible Terms and conditionsThis rapidly growing energy market may evolve New Risk Distribution Model. The importers not onlywill demand that the suppliers bear some of the risks they have taken, but also that they may seeknew profits in return for the additional risks they are going to assume by enrolling themselves intoentire LNG chain.Indian importers shall endeavor to create an optimal portfolio of LNG contracts by negotiating differentpricing formula with different contractual terms. This will enable them to match demand patterns,customer needs and lower generating costs.
Natural Gas Trade
Given the distances between gas reserves and gas markets, as natural gas reserves are concentratedin a few geographical areas of the world, there is a need to transport naturalgas over long distances, across oceans and country borders. Natural gas can be transported inpipelines or as LNG. As natural gas is inherently bulky, it cannot be economically transported in itsgaseous form by pipeline across deep oceans over long distances (over 2,500 km), even where longdistance transportation is technically feasible. Once liquefied, however, natural gas is much more
compact, occupying 1/600th of its gaseous volume. This makes LNG convenient and safe to handle,transport and store in large amounts as energy in liquid form. With steady growth in demand, worldtrade in natural gas has also increased at a CAGR of about 8% over the past 28 years. Between 2001and 2002, both pipeline exports and LNG exports grew by 4.9%. Projected increases in consumptionwill require bringing new gas resources to the market. Numerous international pipelines are eitherplanned or are already under construction. The development of liquefaction technology, the need totransport natural gas over long distances across oceans, coupled with cost decreases throughout theLNG chain, has made LNG more economical, and led to expectations of strong growth in internationalLNG trade. The economics of transporting natural gas to demand centers currently depend on themarket price, and the pricing of natural gas is not as straightforward as the pricing of oil. More than50% of the world's oil consumption is traded internationally, whereas natural gas markets tend to bemore regional in nature, and prices can vary considerably from country to country. In Asia and Europe,for example, LNG markets are strongly influenced by oil and oil product markets rather than by naturalgas prices. As the use and trade of natural gas continues to grow, it is expected that pricingmechanisms will continue to evolve, facilitating international trade and paving the way for a natural gasmarket
LNG Trade
International trade in LNG, which began in 1954, has grown to 150 bcm in 2002. Thisaccounts for around 26% of the total trade of natural gas internationally; the balance natural gas istraded via pipelines. Asia Pacific accounted for about 70% of total LNG imports in 2002 followed byEurope and North America. Japan and South Korea are the key markets for LNG, where natural gascannot be supplied through pipelines. Japan is the largest importer of LNG in the world, andaccounted for 48.5% of total LNG imports in 2002. LNG imports in most countries are backed by theGovernment or state-owned entities, like Kogas in South Korea, China Petroleum Corp in Taiwan, andGaz de France in France. In Japan, the importing agencies are power utilities for captive use of naturalgas, and gas utilities for distribution. The major exporters of LNG currently are Indonesia, Algeria,Malaysia and Qatar. LNG project developers typically seek a long term contract (20-25 years) for theirproduct at a price that is sufficient to cover their capital costs, which includes take-or-pay and floorprice arrangements to ensure that the project can service its debts even in a lower than- anticipated

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